Trap for the Unwary! Employee Transportation and Parking Benefits Might Be Taxable
Tax-Exempt Organizations Alert 02/15/18 Norah L. Jones, Jodi P. Patt
The Tax Cuts and Jobs Act (the Act) passed in dramatic fashion late in 2017 and brought with it a host of changes for taxable and tax-exempt entities. One change affecting tax-exempt employers that may have gone unnoticed is that the Act expanded the definition of unrelated business taxable income (UBTI) to include certain fringe benefits provided to employees. If you are a tax-exempt organization that provides any of these benefits to employees, you should take steps now to identify and plan for these new tax consequences.
The Act states that a tax-exempt organization will have UBTI to the extent it pays or incurs expenses for any of the following, but only if the payment or expense is not otherwise deductible under the regular business expense deduction rules:
- Qualified transportation fringe benefits. This encompasses most benefits provided to employees to decrease the cost of their commutes, such as transit and parking passes; bus, carpool, and other commuter highway vehicles; bicycle commuting programs; and reimbursement of any of the foregoing.
- Qualified parking: This includes costs associated with providing a parking facility to employees on or near the business premises of the employer, or on or near a location from which the employee commutes to work.
- On-premises athletic facility: This is defined as any gym or other athletic facility located on the premises of the employer, operated by the employer, and substantially all the use of which is by employees of the employer, their spouses, and their dependent children. Note, however, that on-site athletic facilities appear to remain deductible under the regular business deduction rules. Accordingly, it appears that expenses related to providing on-site athletic facilities will not be UBTI after all.
There is significant confusion and lack of clarity regarding how these provisions will be interpreted or applied. For example, will an organization have UBTI if it permits employee parking in spaces owned by the employer, or only if the parking is in spaces for which the employer must pay a third party? Will an organization have UBTI if it sponsors a pre-tax employee parking or transit program, or only if it provides those benefits at no cost to the employees?
One thing is clear despite this confusion: many tax-exempt organizations will have UBTI (and a Form 990-T filing obligation) for the first time as a result of these new rules. This will lead to increased administrative and tax burdens for tax-exempt employers, many of whom already struggle with tight budgets and limited resources.
Some employers may choose to avoid the filing obligation by (1) treating the fringe benefits described above as part of an employee’s taxable wages and reporting their value on the employee’s W-2; or (2) foregoing these fringe benefits altogether. These approaches are not without complications, however, and likely cannot be implemented fully in this calendar year. If you provide any of these benefits to your employees, it is important that you talk with your tax advisors and return preparers now so that you can plan accordingly.
The attorneys in the Tax-Exempt Organizations Group at Quarles & Brady are reviewing the new provision’s implications for tax-exempt employers and are happy to discuss its potential applicability to your organization.